Enterprise Risk Management Among Commercial Banks

Abstract

This project work majors on the effect of Enterprise Risk Management (ERM) adoption on a commercial bank's corporate reputation and its overall effect after adoption of the strategy. ERM may impact corporate reputation in a variety of ways. First, ERM is a management process that enables a firm to holistically manage all risks. This creates a process in which individual risks, including reputation risk, are identified, assessed, and managed in a unified manner so that the firm value is maximized. Second, ERM encourages disclosure of risks, so that stakeholders can better understand bank‟s risk appetite, which risks a bank is accepting and which it is avoiding. This greater disclosure is generally viewed positively by outside stakeholders because it allows them to better manage their own risk profiles. Finally, ERM provides a strategic response to a reputation damaging event. From a thorough examination of a range of reputation proxies, it‟s evidenced that implementation of an ERM program may enhance corporate reputation, though more clearly felt in the long-term. This is more evidently explained by yearly time series plots on the relevant proxies found to contribute significantly to the expected results, an elaborate long-run effect as opposed to when absolute yearly proxy values are used. In addition, ERM adoption tends to occur during a period in which various reputation measures tend to be decreasing, suggesting the commercial banks may be implementing ERM as a response to a decline in corporate fortunes. The results obtained suggest that following ERM adoption, the decline in reputational measures appears reduced, and in some cases reversed.